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Wednesday, October 03, 2007

Looking at the way thinks are shaping up in Spain, and at the same time living here, I am obviously going to follow this one close up now.

I have been looking in the statistics office site for data on mortgages, but unfortunately the most recent we have at this point are July. Since the data we really need are for September, this means we won't really know the full extent of the initial hit on Spain till early December. Nonetheless some indication can be obtained by looking at what was happening before things seized up.

If we look first and the number of mortgages made each month.

Now if we look at the value of these mortgages in millions of euro.

What we can see is that the property market in Spain really peaked towards the end of 2006. The market hit a bottom in April, but there was a rebound in May (offers from property promotors?). But the rebound was not sustained and then the market again resumed the downward march. All we need to know now is the extent of the damage in September, and how low can we go. I am not optimistic. This is with us for some timne to come, and will probably be - proportionately - much more important that what is happening now in the United States.

While it should be obvious to anyone that the most of the national economies in the Eurozone are slowing rapidly, and have been in the Italian and German cases since early summer, this downturn will present some new features. In particular the former "stellar economies" - Spain, Ireland and Greece - may be the worst affected due to their heavy dependence of construction activity for obtaining growth, and due to the dramatic nature of the downturn since mid-August in the property sectors of those countries.

Up to now the data in this regard has been rather anecdotal, like the big drop in cement output in Greece, but today we have a first real data reading (retail sales etc data for the relevant period will still be a little while arriving) in the shape of the Spanish Consumer Confidence Index. Over to Bloomberg:

Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.

The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.

The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.

``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.

The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.

Here's the chart:

and here's the chart for the sub-components:

What can be seen from this chart is that all the components reached a peak this summer in April and May, in June and July they were all down, but only to the level of February/March, then from July onwards the whole thing starts to subside, and who knows if we have touched bottom yet, since all the forward indicators are a bit more positive, but my feeling is that that is rather an indication of the fact that people still don't appreciate the gravity of what is happening. It hasn't sunk in yet, and people are still expecting the housing market to pick up in a quite unexpected fashion. Spain could face a hard landing. If things continue to move at this speed it will get one.

Also service activity in Spain, which accounts for some 60 percent of the economy, posted its slowest expansion in almost two years in September, according to a separate survey of executives by NTC economics. The index fell to 52.4 from 53.5 in August.

A similar picture can be seen in the manufacturing PMI, although manufacturing accounts for a much smaller part of total economic activity in Spain than in some other European economies.

In the case of manufacturing, the rate of expansion has been slowing since June, although some reduction of activity is normal in the summer. It is the September reading which should give cause for concern here.

At the present time we are simply talking about a slowdown in the rate of expansion, but how far is this now away from an actual contraction. Not very, I would say.

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About

Edward 'the bonobo' is a Catalan economist of British extraction based in Barcelona. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".
He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".
Apart from his participation in A Fistful of Euros, Edward also writes regularly for the demography blog Demography Matters. He also contributes to the Indian Economy blog . His personal weblog is Bonobo Land . Edward's website can be found at EdwardHugh.net.

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What Is Spain Economy Watch?

Spain Economy Watch is a weblog - run by Edward Hugh - which is dedicated to following the day to day progress of the Spanish economy as part of the eurozone system. The Weblog arose out of my curiosity concerning how the system operated in connection with the evident demographic patterns which are to be found among the various member states of the zone. The roots of the particular mix of economic problems which some of these economies now seem to be facing, in particular in association with the ending of the construction boom, about what can be done to address these problems, and about what might be learnt from studying the situation as it evolves.

Spanish society shares in common with the other Southern European zone members a historically unprecedented combination of structural problems stemming from a very rapid decline in fertility and increase in life expectancy - both of which tend towards a situation of rapid population ageing. One consequence of the fertility decline is that there is often now insufficient insufficient domestic labour supply to meet the growth needs of these societies, needs which are only reinforced by the weight of the pensions liabilities which are now imminently pending. The impact of this has been a considerable migration inflow which has both been fueled by and in turn has fueled a construction boom.

Needless to say none of these problems were ever really contemplated when the present generation of economic textbooks was written. Dealing with this whole problem set has become a most pressing concern, both theoretically and practically.

A great deal more background and information about the theoretical perspective which informs this blog may be found over at the Demography Matters blog.